Barman Robbie Dale fired the part-timers into a 2-0 half-time lead against their Championship opponents, sparking jubilant scenes at Croft Park.
However, Birmingham emerged for the second half with renewed vigour, and a 52nd-minute drilled strike from Lee Novak gave the home fans cause for concern.
Their worst fears were realised as Birmingham turned the game on its head before the hour mark - Wes Thomas netting twice to save manager Gary Rowett's blushes.
Despite dominating possession and chances, Steve McClaren's men had failed to find a way past their visitors from the Conference, for whom David Raya Martin made a string of excellent saves, but earned a late reprieve when Luke Foster fouled Johnny Russell in the box.
While East Midlands rivals Derby benefited from a late spot-kick, Forest were left ruing conceding one in the 12th minute of their third-round clash - Peter Vincenti firing home following Michail Antonio's indiscretion to earn a 1-0 win for Rochdale.
Millwall and Bradford shared six goals and face a replay to determine who will progress to the next round, while Wolves' visit to Fulham and Doncaster Rovers' home clash with Bristol City also ended all square.
West Brom, who were under the leadership of Tony Pulis for the first time, faced early resistence from Conference side Gateshead, but raced to a 7-0 triumph after Saido Berahino opened the floodgates in the 42nd minute - the first of four goals for the young striker.
Bolton Wanderers and Cambridge United complete the list of Saturday's winners after progressing past Wigan Athletic and Luton Town.
